The trustee for Sprout Mortgage in its bankruptcy case is seeking funds from Michael Strauss, his holding companies and his wife and two daughters, according to a complaint filed last week. At least $27 million was transferred from Sprout's accounts to entities and insiders related to Strauss ahead of a 2023 bankruptcy filing, attorneys wrote. 

"This pattern of transactional activity has the hallmarks of money laundering," wrote Todd Gardella of Westerman Ball Ederer Miller Zucker & Sharfstein LLP, a special litigation counsel to the trustee. 

Strauss used funds he funneled from Sprout to pay for personal expenses including $2.3 million for homes in New York City and the Hamptons; $1.2 million for horse racing and breeding activities for one daughter; and $69,000 in college expenses for his other daughter, according to a court review.

"The millions of dollars in payments to Strauss left Sprout in a weakened financial state, by depleting its cash reserves such that the company was left vulnerable against the decline in the real estate market," Gardella wrote. 

Counsel on behalf of the trustee declined to comment Tuesday, while Strauss and an attorney for the former CEO didn't respond to messages seeking comment. 

The non-qualified mortgage lender shut down in July 2022, abruptly laying off over 600 employees. It counts $66 million in claims from industry counterparties. It also allegedly owes $15.5 million to the Internal Revenue Service for payroll taxes it failed to pay since June 2017, according to last week's complaint. 

Bankruptcy proceedings have also prevented a class of former Sprout workers from receiving a $3.5 million settlement over their lawsuit seeking wages from the time of their layoff. 

Forensic accountants in the wage case found Strauss received net transfers of $24.4 million between January 2022 and September 2022, largely through the lender's parent company Recovco Mortgage Management. Strauss received around $3.5 million more in the seven months preceding the lender's shutdown. 

Recovco president Craig Pino testified in the bankruptcy case he had no understanding of the funds Recovco received or transferred. Pino formerly worked as treasurer alongside Strauss at American Home Mortgage, the company at which Strauss paid a $2.45 million fine to feds over Great Financial Crisis-era fraud charges. 

Strauss and his wife Elizabeth also received approximately $10.59 million from Sprout passed through Midland American Capital Corp., a purported "insider" company of Strauss, in the two years preceding Sprout's bankruptcy. Other holding companies in which Strauss allegedly moved Sprout funds through include Florida-based Smart Rate Mortgage and Colorado-based Investor Funding Corp.

Strauss reportedly originated over $5 million in loan volume through Smart Rate before his license was pulled. Elizabeth Strauss, under whom the company was registered to, testified to the trustee she knew very little about Smart Rate and Michael Strauss was in control. 

The bankruptcy trustee is seeking an injunction against Strauss' family and holding companies to safeguard against further fraudulent moves. 

Former Sprout executives meanwhile are seeking to dismiss themselves from their former employees' wage claims. Strauss also hasn't yet retained an attorney in that case; a joint status report is due to the court March 8.